Chris Heitman, the owner of a successful auto racing supplies business in Wisconsin, is getting hounded by out-of-state revenue officials trying to collect sales taxes for online transactions. Reason detailed his plight earlier this month.
After years of congressional inaction on the question of whether internet retailers should have to pay state-level sales taxes, the U.S. Supreme Court last year upheld a South Dakota law allowing the state to collect taxes from businesses that make at least 200 transactions or do $100,000 of gross sales into the state. That decision, in Wayfair v. South Dakota, set off a mad scramble in other states to set similar standards for taxing out-of-state businesses. States are eyeing a windfall of revenue by targeting online sellers like Heitman—New Jersey, for example, plans to collect $3 billion in sales taxes this year from businesses outside the state—in what can be described literally as taxation without representation.
For Heitman and other owners of small and mid-sized businesses, that means having to get up to speed on tax codes in 45 different states. (The five other states have no sales tax.) It's not as simple as looking up what rate to pay; state sales tax codes are notoriously complex.
This week, Heitman emailed to tell me about a "tremendously complicated and expensive compliance labyrinth" he's encountered in Kentucky.
Heitman says his business made $1,500 in profit on roughly $38,000 in gross sales over 299 transactions in Kentucky during 2018. Because the number of transactions is high enough to trigger the new post-Wayfair standard, he owes sales taxes to the state. It's going to cost at least $750 to having his accounting firm prepare the 17 pages of tax forms the Kentucky Department of Revenue sent him, he says, and that's not counting the expense of actually paying the tax itself.
"Tax compliance costs will ensure an actual net loss on Kentucky sales," he writes. "We would be better off putting a notice on our website saying that we can no longer ship any orders to Kentucky."
It's Congress that must ultimately address the chaos created by the Wayfair ruling, as this is plainly a question of regulating interstate commerce. You'd rarely lose by betting against congressional action, but a bipartisan bill introduced Wednesday offers a glimmer of hope for entrepreneurs like Heitman.
The Online Sales Simplicity and Small Business Relief Act, introduced by Rep. Jim Sensenbrenner (R–Wisc.) and cosponsored by Reps. Jeff Duncan (R–S.C.), Anna Eshoo (D–Calif.), and Zoe Lofgren (D–Calif.), would ensure that states cannot require remote online sellers to collect sales tax retroactively on transactions made before January 1, 2019. That gives small businesses at least the rest of this year to adjust to the Wayfair landscape, freeing Heitman from having to pay taxes to Kentucky, and any other states, for sales made during 2018.
More importantly, it would exempt sellers who gross less than $10 million in annual sales from owing taxes to other states. That's a much higher threshold than the 200 transactions/$100,000 standard created in Wayfair, and it would mean that Heitman's $38,000 in Kentucky sales would remain tax-free.
That exemption would be repealed, the bill says, if states agree to a simplified sales tax compact that is approved by Congress. In the long term, that's probably the best way for states to collect remote sales taxes. Rather than having to comply with all sales tax rules in 45 different states, a simplified compact might see all states agree that cross-border sales will be taxed at a single, flat rate.
Until a compact like that exists—and it likely won't exist unless Congress gives states a strong incentive to agree to one—Sensenbrenner's bill would protect small and mid-sized online businesses from being hounded by out-of-state taxmen.
The post Bill Could Solve 'Compliance Labyrinth' Facing Some Businesses After SCOTUS Online Sales Tax Ruling appeared first on Reason.com.
]]>When he started selling race car equipment 40 years ago, Chris Heitman never imagined that he'd have to learn which states charge sales tax for fireproof underwear.
"Is it clothing? Is it specialized equipment? That's the question," he says. And since the answer isn't always clear, he errs on the side of charging the tax—better to overcharge a customer than to face the wrath of the taxman, after all.
Heitman and his wife, Carla, have been running Pegasus Auto Racing Supplies since they founded the company back in 1980, out of a two-story building in New Berlin, Wisconsin. Until last year, that meant Heitman was responsible for collecting and paying sales taxes to exactly one place: the Wisconsin Department of Revenue. But thanks to an under-the-radar ruling from the U.S. Supreme Court in June, he's now receiving letters, phone calls, and emails from revenue officials across the country, each wanting a piece of his business.
The source of Heitman's frustrations is Wayfair v. South Dakota, which allowed states to collect sales taxes from online businesses located beyond their borders. Many states view the Wayfair ruling as a potential tax revenue windfall in which the taxes are paid by non-residents who can't vote against them. That's why businesses like Heitman's are now facing the chilling prospect of owing taxes in dozens, and possibly hundreds, of different jurisdictions—while being hounded by out-of-state tax collectors.
Since the Supreme Court issued its ruling in June, Heitman has been scrambling to become compliant with tax commissions and revenue departments from coast to coast. He's spent thousands of dollars on new software to help navigate the complexities of state sales tax law, but that's only been so much help. "It almost seems like I have another full time job dumped on me with this sales tax thing," he says. "It's burning me out."
As the 2019 tax season begins, states are ramping up efforts to squeeze extra revenue out of remote retailers like Heitman, putting an expensive new burden on businesses that have found broad customer bases online. The burden is particularly large in the five U.S. states that charge no sales tax, where entrepreneurs could now be charged with paying a tax they have never had to pay before, to a government over which they have no voice. And while Congress could clean up the Supreme Court's mess, it's far from certain that it will.
The Supreme Court Overturns a Sales Tax Precedent
The question of whether states can charge taxes on out-of-state goods predates the U.S. Constitution. In fact, it's one of the primary reasons it came into being in 1787.
The Articles of Confederation allowed each state to set its own rules for cross-border trade, creating barriers to interstate commerce. The Constitution thus gave the federal government explicit control over interstate commerce. In Federalist 42, James Madison said this was necessary, because otherwise states "would nourish unceasing animosities, and not improbably terminate in serious interruptions of the public tranquility."
In the decades that followed, various Supreme Court rulings developed into a legal doctrine known as the "dormant Commerce Clause." This assumes the Constitution forbids state-level policies that limit the free flow of commerce. That rationale was the basis of Quill Corp v. North Dakota, a 1992 Supreme Court ruling blocking North Dakota from collecting sales tax from a catalog-based office retailer that sold goods to other businesses in the state, but that did not have a physical location in North Dakota.
Last year, South Dakota succeeded where North Dakota had failed. At the root of the Wayfair case was a South Dakota law claiming that the state had the authority to collect sales tax from any business that made at least 200 transactions or $100,000 in sales into South Dakota in a single year. The Supreme Court upheld that law, and ruled that the 1992 North Dakota ruling was "unsound and incorrect," as Justice Anthony Kennedy put it in the majority opinion—the last that he would author before retiring in July.
The earlier Quill ruling, he wrote, had become "a judicially created tax shelter for businesses that decide to limit their physical presence and still sell their goods and services to a state's consumers—something that has become easier and more prevalent as technology has advanced." The 5-4 majority cut across the Supreme Court's usual ideological lines, with Ruth Bader Ginsburg joining conservative justices Clarence Thomas, Samuel Alito, Neil Gorsuch, and the moderate Kennedy in support of South Dakota's law.
The court's liberal wing, minus Ginsburg, joined Chief Justice John Roberts' dissenting opinion, which largely agreed with Kennedy that Quill was decided incorrectly, but insisted it was Congress' duty to fix that problem.
"By suddenly changing the ground rules, the Court may have waylaid Congress' consideration of the issue," Roberts wrote. States had been petitioning Congress for years to change the rules for interstate sales taxes, but Roberts worried that an abrupt change of direction ordered by the courts would steer state efforts towards "securing new tax revenue from remote sellers."
A Ruling Both "Sweeping and Vague"
In the months since the Wayfair ruling, Roberts' concerns have been vindicated. The ruling was both "sweeping and vague," says Andrew Moylan, vice president of the National Taxpayers Union Foundation, a nonprofit that advocates for lowering taxes. "The result is that there's an enormous amount of gray area that states, businesses, and policy experts are trying to define in the face of very thin guidance from the Court."
The most important of those gray areas is the question of when a business is considered to have done enough business in a certain state to owe sales tax there. The South Dakota law that was the basis of the Wayfair case specifies a threshold of 200 transactions or $100,000 worth of sales. That's a high enough threshold to exempt most small businesses and online sellers from owing sales taxes to South Dakota. But using the same standards in a state with a lot more potential buyers—California, for example, whose economy is more than 50 times larger than South Dakota's—has the potential to ensnare many more businesses.
With no clear instruction from the federal government, states have quickly stepped up to fill in their own. Days after the ruling, lawmakers in New Jersey introduced a bill to hit out-of-state retailers with a 6.625 percent tax on sales into the state—and state lawmakers touted the potential for it to generate more than $300 million in annual revenue.
In many cases, new legislation wasn't even required. In January, the New York Department of Taxation and Finance reinterpreted existing sales tax rules to cover any business that does more than $300,000 of gross sales in the state or made 100 transactions with New York customers. The California Department of Tax and Fee Administrators announced in December that remote sellers will owe taxes if they do more than $100,000 in California sales or have 200 transactions. The state expects to generate $500 million from those new collections. Most other states have made similar changes to their laws or tax codes, or are now considering such changes.
It's not just states. In many places, counties and cities have their own sales taxes applied on top of the state rate. In the 45 states with sales taxes, there are more than 12,000 tax jurisdictions, says Moylan. Although it is unlikely that a small business would do enough sales in that many locations to hit the sales tax threshold, it's not impossible. Heitman does enough sales in California that he worries he could be on the hook for taxes in some of those local jurisdiction too—although he's not entirely sure.
"It almost seems like I have another full time job dumped on me with this sales tax thing. It's burning me out."
Determining where and what a business owes is its own burden, and the largest costs are born by medium-sized businesses like Heitmans. Bigger businesses are better able to handle the increased compliance costs created by Wayfair, and truly small businesses are unlikely to surpass the various sales thresholds to trigger tax collections—but for those in the middle, the sudden shift in the playing field is "hair-raising," says David Mittelstadt, a tax attorney from Chattanooga, Tennessee, and chairman of the Tennessee Bar Association's tax section.
The transaction limits are what will capture many of them, he predicts. "Because, you know, 200 sales when you're selling industrial turbines is one thing," says Mittelstadt. "If you're selling t-shirts, you could hit those thresholds at a very low volume of sales."
That's exactly what's facing Kenny Ballard, CEO of The Mountain, a New Hampshire-based company that sells T-shirts online—including the internet-famous shirt featuring three wolves howling at the Moon. At approximately $25 per shirt, 200 sales into a certain state is a mere $5,000 in revenue for Ballard's company but would be enough to trigger tax obligations, cutting into profits and requiring new expenditures on reporting and compliance.
For business owners, the challenge isn't just determining if they owe, it's determining what. State sales tax codes are notoriously complex, and no two are exactly alike. In Pennsylvania, for example, most clothing is exempt from the state's 6 percent sales tax—unless it is considered formalwear or recreational equipment. In practice, that means a pair of gloves would not be taxed, except if it's considered skiing equipment, in which case the exact same pair of gloves would be taxed. New York taxes Yoo-hoo, a milky, chocolatey drink—but not chocolate milk. Coffee is not subject to sales tax in Colorado, but you will be charged tax if you get a to-go cup with a lid, which is considered "nonessential packaging" under state law.
That's why Heitman spends a lot of time thinking about the tax status of fireproof underwear, but he's hardly alone. Micro-retailers operating through marketplace sites like Etsy, for example, sell all variety of handmade items—from homemade moccasins to unicorn fluff. Adding to the confusion, transactions of non-taxable goods in some states still count towards the overall transaction threshold that determines whether a seller has to pay taxes. Since the Wayfair ruling, Etsy has updated its seller handbook to keep users aware of the shifting playing fields, and the platform is now collecting and paying sales taxes on behalf of users in states where the laws have changed.
For small businesses operating outside of an online marketplace, software can help navigate the complexity of suddenly having to understand thousands of different tax codes. But it's only so useful, and it can be expensive. Heitman says he paid $6,000 for a program that calculates taxes owed based on buyers' ZIP codes, but it's also brought him additional frustration. "Some of the addresses cannot be validated," he says, recalling an order that was shipped to a building at Newark Airport. The address was rejected because it was not in the U.S. Postal Service database. "Apparently the Postal Service doesn't deliver there—but this was a large package shipped by UPS."
"It's just ridiculously time-consuming every month," he says.
A Problem Fixed by Software—or Congress?
In writing the majority opinion in Wayfair, Justice Kennedy waved away some of Roberts' worries about how the court's abrupt overturning of the decades-old precedent would create chaos by pointing to the fact that computers could solve the mess—or that they would, maybe.
"Eventually, software that is available at a reasonable cost may make it easier for small businesses to cope with these problems," he wrote. And if that doesn't fix it, he added with one of the all-time great hand-waves in Supreme Court history: "In all events, Congress may legislate to address these problems if it deems it necessary and fit to do so."
So, will it?
Even before Wayfair, there were good reasons for congressional action on an issue that fits very squarely within the enumerated power of the federal government to regulate interstate commerce. In the wake of last year's Supreme Court ruling, congressional involvement now seems both more urgently needed and less likely to happen.
One potential vehicle for resolving problems created by Wayfair is a bill sponsored by Rep. Jim Sensenbrenner (R-Wisc.), first introduced in October and likely to be re-introduced to the new session of Congress within the coming weeks. His bill, the Online Sales Simplicity and Small Business Relief Act, would add important specifics like prohibiting states from collecting out-of-state sales taxes on transactions that occurred before January 1, 2019, essentially giving businesses much-needed time to get up to speed on the new requirements without suddenly being hit with tax bills they weren't expecting.
Most important of all, the bill would create a $10 million sales tax exemption for all small businesses that do not have a physical presence in a given state. That means upping the $100,000 threshold in the South Dakota law that triggered the Wayfair case to a level far in excess of what a small business would have in sales—effectively removing the ability of states to target all but the largest of remote sellers.
"Small business owners, in particular, have shared fears that they will be unable to bear the new compliance burdens and may have to shutter their businesses," Sensenbrenner says. "I've heard from online sellers in Wisconsin and across the country who are concerned with the complexity of the post-Wayfair tax regime."
The bill is likely to have bipartisan support in the House this year, with Reps. Anna Eshoo (D-Calif.) and Zoe Lofgren (D-Calif.) lined up as co-sponsors, along with Rep. Jeff Duncan (R-S.C.).
But cities and states eyeing a windfall in new tax revenue are likely to organize against congressional action. Late last year, a coalition of groups including the Council of State Governments, National Association of Counties, and the United States Conference of Mayors sent a letter to Congress decrying efforts to "undermine" the Wayfair ruling.
States With No Sales Tax Fight Back
While many states likely will work to keep the Wayfair ruling, a smaller group are already organizing to fight its effects. No state is likely to fight harder than New Hampshire, which has a long track record of defending its residents from out-of-state tax collection.
In December 1976, the New Hampshire State Police literally arrested two agents from the Massachusetts Tax Commission. The agents had been staking out a parking lot in the small town of Hinsdale, barely five miles north of the Massachusetts border, looking for Massachusetts license plates as part of an effort by other New England states to crack down on tax-free cross-border holiday shopping. Unhappy with other states targeting shoppers and businesses in New Hampshire, Gov. Meldrim Thomson told the state police to keep an eye out for revenue agents—and to charge them with loitering if they were caught.
The two officers were released without charges, but the incident prompted the president of the Massachusetts State Senate to threaten—only probably in jest—to declare war on New Hampshire. The arrests were part of a long-simmering conflict between New Hampshire and its neighboring states over sales tax collection. Following Wayfair, New Hampshire has been moving to fortify itself once again.
"Our retailers don't have the infrastructure set up to collect sales taxes," says Nancy C. Kyle, president of the New Hampshire Retailers Association. "New Hampshire has chosen to balance its budget without the use of sales taxes, so making our businesses collect sales taxes for other states, that's just ludicrous."
So while other states hurried to legalize out-of-state tax collections in the wake of the Wayfair ruling last year, New Hampshire's lawmakers were rushing to the barricades. Gov. Chris Sununu called the state legislature into a special session to create a legislative task force to address the Wayfair ruling and issued an executive order telling the Department of Justice to monitor for tax collection activities by other states against New Hampshire businesses. "Our goal is basically to create every possible barrier that you can imagine, so that even if we are forced to do it, it would be really hard for any jurisdiction to try to do it," Sununu, a Republican, told the Conway Daily Sun at the time.
The state also set up a website inviting businesses to report collection efforts—although the website is clear that the state will not represent New Hampshire-based businesses if they are targeted by out-of-state revenue hounds.
"You can't let one state impose its law on another state. That's my real concern," says state Rep. Betty Gay (R–Rockingham). She's sponsoring a bill this year declaring the right of New Hampshire businesses to refuse to collect and remit sales tax to other states on the grounds that such a requirement would violate the state and federal constitution. Other bills would require out-of-state taxing authorities to comply with all New Hampshire revenue laws before being able to collect from in-state businesses, as well as force other states to reimburse New Hampshire businesses for any costs incurred.
It might not require the physical arrest of revenue offices, but New Hampshire public officials are doing everything short of standing at the border and daring other states to try it.
"It's part of our identity, and it's part of how we survive as a state," says Gay. Forcing New Hampshire businesses to collect sales taxes for other states would be "more than an inconvenience or an expense," she says. "It would be cutting us off at the knees."
They might get some help from Congress too. Last month, Sens. Jeanne Shaheen (D-N.H.), Maggie Hassan (D-N.H.), and Jon Tester (D-Mont.) teamed up to introduce a bill fully overturning the Wayfair ruling. Montana is another of the five states with no sales taxes (Alaska, Delaware, and Oregon are the other three).
"States like New Hampshire have a competitive advantage because of our lack of a sales or income tax," Hassan told Reason. "I'm deeply concerned that the backward Supreme Court ruling would threaten that advantage or inhibit economic growth by requiring small businesses to collect internet sales tax for other states." It's familiar territory for Hassan. In 2009, as a member of the state House, she sponsored a bill to make it illegal for New Hampshire to share tax information with other states.
"There's something psychological about not having to pay a sales tax that people really enjoy. You have an 8 percent sale—no one is going to go to that. But to avoid paying the 8 percent sales tax, they'll drive up here to New Hampshire," says Kyle. "They feel like they are sticking it to the government."
"It's Going to Be Just Horrendously Expensive"
The days of paying no sales tax online in states like New Hampshire may feel good, but they are probably coming to an end. Even critics of the Wayfair ruling don't deny that the Quill decision—decided two years before Amazon.com existed, when mail order catalogs were the cutting edge of retail—was an anachronism. With e-commerce accounting for more than $500 billion in sales during 2018, and certain to keep growing, it was really only a matter of time before states convinced Congress or the courts to let them have a larger slice of that pie.
It's up to Congress, then, to restrict overly aggressive state revenue departments, limit the confusion facing e-retailers of all sizes, and help small businesses that cannot afford the burden of dealing with hundreds of different taxing jurisdictions at once.
"It costs a lot just to have our accounting firm do our sales tax returns just for our home state of Wisconsin," says Heitman. "If I start having them do all these individual tax returns for all these states it's going to be just horrendously expensive."
State lawmakers and tax officials don't have much of an incentive to follow in New Hampshire's footsteps. In fact, the opposite is true. But even in the absence of federal legislation, state policymakers should be careful not to break the Golden Rule. "Do unto residents of other states as you would have those states do to your residents," says Bartlett Cleland, a vice president of the American Legislative Exchange Council. In the rush to squeeze cash from other states, lawmakers might end up encouraging more aggressive raiding of their own businesses, he warns.
That sounds a lot like what was happening during the Articles of Confederation. "I think a lot of this is a failure to appreciate history," says Cleland. "I don't think anybody is thinking about the very logical conclusions to these things."
If states wrote simple, flat tax requirement for out-of-state retailers, Heitman says that would help. Illinois, for example, has a flat rate of 6 percent for online sales taxes, which at least does away with confusion over what items are subject to tax. Better, he says, would be a federal law that exempts the first $500,000 of sales into any state. That's the sales threshold that Texas set on January 1 when it announced it would start collecting taxes from remote sellers.
Until that happens, Heitman will have to keep trying to figure out whether Connecticut taxes fireproof underwear. "My wife, she can see that it's stressing me out. What do you do? Do you keep fighting it or just give up? I hate talking that way, but it's just frustrating."
The post The Supreme Court's Online Sales Tax Ruling Is Already a Huge Headache for Small Businesses appeared first on Reason.com.
]]>Today the Supreme Court overturned past decisions and ruled, 5–4, that states may potentially demand that businesses that don't have actual physical presence within their borders still pay sales taxes on what they sell to residents who live there.
The ruling in South Dakota V. Wayfair overturns two previous Supreme Court precedents (Quill Corp. V. North Dakota and National Bellas Hess V. Illinois) that limited states' ability to charge sales taxes on goods that were shipped to customers in the state if the businesses did not have any physical presence in that state. Consumers themselves could be ordered to pay sales taxes, but of course, compliance was extremely low.
South Dakota believed it was losing millions of dollars per year in tax revenue and passed a law requiring out-of-state vendors to charge and submit sales taxes to the state if they reached a threshold of selling $100,000 worth of goods or 200 or more separate deliveries into the state. South Dakota petitioned the Supreme Court to vacate its previous precedents so it could demand online vendors like Wayfair and Overstock.com (defendants in the case) to pay the sales taxes.
The majority agreed, in an odd combination of judges that defies ideological analysis. Justice Anthony Kennedy wrote the majority decision, joined by Clarence Thomas, Ruth Bader Ginsburg, Samuel Alito, and Neil Gorsuch. The dissenting opinion was written by Chief Justice John Roberts, joined by Stephen Breyer, Sonia Sotomayor, and Elena Kagan.
The majority justified the decision partly because, as online commerce has grown, these precedents now unfairly punish companies who are based within a state when compared to those who are situated elsewhere. The majority accepted the argument that their previous precedents actually created an uneven tax environment:
In effect, Quill has come to serve as a judicially created tax shelter for businesses that decide to limit their physical presence and still sell their goods and services to a State's consumers—something that has become easier and more prevalent as technology has advanced.
Worse still, the rule produces an incentive to avoid physical presence in multiple States. Distortions caused by the desire of businesses to avoid tax collection mean that the market may currently lack storefronts, distribution points, and employment centers that otherwise would be efficient or desirable. The Commerce Clause must not prefer interstate commerce only to the point where a merchant physically crosses state borders. Rejecting the physical presence rule is necessary to ensure that artificial competitive advantages are not created by this Court's precedents. This Court should not prevent States from collecting lawful taxes through a physical presence rule that can be satisfied only if there is an employee or a building in the State.
This ruling pretty much ignores the idea that states can make themselves more desireable for businesses to locate there by, say, lowering their taxes. There may be some severe and unbalanced consequences for smaller businesses attempting to try to navigate extremely varied sales tax laws when selling goods. Big vendors can (and most already have) done the tech work to make compliance possible. But as Veronique de Rugy warned in April, this ruling today could jack up compliance costs for small online retailers, requiring them to calculate the demands of 12,000 tax-collecting jurisdictions.
In a statement in response to the ruling Erik Jaffe, appellate attorney for the Competitive Enterprise Institute (which submitted a brief supporting the online vendors), lamented, "In allowing states to extend their taxing authority beyond their borders, [the court] passed up an opportunity to reassert the horizontal federalism principles of the Constitution. Rather, adopting mistaken notions that state sovereignty extends beyond state borders and that the purchasing power of state citizens are assets belonging to the state, the court fundamentally subverts federalism."
CEI is calling for Congress to fix the problem with legislation that would stop states from demanding taxes from businesses in other states. Normally, you'd think a Republican Congress would jump on this, but have you heard about President Donald Trump's crusade against Amazon and its founder Jeff Bezos?
The post Supreme Court Rules States Can Demand Outside Online Retailers Collect Sales Taxes appeared first on Reason.com.
]]>If you think internet companies aren't paying any taxes for online sales and that's killing bricks-and-mortar retailers and states' budgets, you, my friend, have been duped. Nothing could be further from the truth. The internet isn't a tax-free zone, nor is the lack of revenue the issue with state budgets. There is, however, a battle about whether state and local governments should be allowed to collect taxes from out-of-state companies.
A 1992 Supreme Court decision, Quill Corp. v. North Dakota, reaffirmed a previous decision that a business must have a significant presence in a state before that state can require it to collect sales taxes. That means a mother selling handcrafted goods on Etsy doesn't have to collect sales taxes from her consumers unless they are physically located in her state. However, Amazon collects sales taxes from customers in all 45 states that have a statewide sales tax because of its vast distribution network.
Most state lawmakers want to see Quill overturned, allowing them to force out-of-state companies to collect sales taxes on their behalf. This argument was just heard by the Supreme Court in the case of South Dakota v. Wayfair Inc. If the states were to win, they would be able to reach into the pockets of that mom selling her paintings on Etsy, even though she may live on the other side of the country, didn't elect other states' officials, and never agreed to those states' tax laws.
More tragically for consumers, tax competition among states would also be lost if Quill were overturned. Under the new regime, online consumers—no matter where they shop or what they buy—would lose the ability to shop around for a better tax system. Without the competitive pressure and the fear of losing consumers to lower-tax states, lawmakers would not feel the need to try to rein in their sales tax burden. It's that pressure, which limits their tax grabbing abilities, that these lawmakers resent and want the Supreme Court to put an end to.
Some of them probably hope that more revenue would alleviate the need to put their financial house in order. They would be wrong. According to the Kaiser Family Foundation, 33 states faced shortfalls in fiscal 2017 and/or fiscal 2018, even though revenue collection has been growing in most states. That's because the more states collect in revenue the more they spend.
Besides, states are overestimating the revenue they'd get from the taxes. Internet sales are still a small share of overall sales, and taxing them wouldn't make much difference. According to a 2017 report by the Government Accountability Office, online sales represent less than 10 percent of retail sales. Also, the 100 biggest online retailers already tax roughly 90 percent of their sales. Desperate lawmakers shouldn't expect to collect any more than 2 to 4 percent of total state and local government tax revenues this way, according to the GAO, were Quill to be reversed.
A reversal would, however, jack up compliance costs for small online retailers, which, unlike Amazon, tend to have razor-thin profit margins. Imagine suddenly having to enforce taxes for the nation's 12,000 tax-collecting jurisdictions.
Talking to NPR on the morning of the South Dakota v. Wayfair hearing, a Republican state senator from South Dakota, Deb Peters, laughed at the notion that anyone would get hurt. According to her, free software provided to online retailers by the majority of desperate states would make that cost zero. This is questionable. As an eBay representative noted on NPR in response that morning, "in Minnesota, blankets are taxable, but baby receiving blankets are not taxable. In Texas, deodorant is taxable, but deodorant that has an antiperspirant is not." Tax software isn't that precise, and compliance would still have to be handled on a case-by-case basis. Repeat this for thousands of items and compliance is definitely not "free."
There is a lot to be lost in the Wayfair case. If Quill were to be overturned, compliance costs could skyrocket for many retailers, and good principles of taxation would be thrown out the window. Healthy tax competition is at stake. Let's hope the highest court in the land makes the right decision.
The post The Supreme Court Eyes Online Sales Taxes appeared first on Reason.com.
]]>Here's the basic lay of the land. Early in the Internet Era (1992), the Supreme Court held, in Quill v. North Dakota, that a State may not require out-of-state sellers of goods or services to collect that State's sales/use tax*, unless the out-of-state seller has some "physical presence" in the State—a retail outlet, warehouse, office, or the like. So when an individual from, say, Illinois purchases goods from a seller located in Missouri—via an order placed over the telephone, or on the Net—Illinois may not require the seller to collect (and remit to Illinois) the sales tax that Illinois imposes on in-state transactions.
*Note that Illinois may—and actually does—impose a tax on Illinois taxpayers (e.g., on the purchaser, in my example) when those taxpayers make a purchase from an out-of-state seller. This tax is known as a "use tax"—based on the notion that it is not taxing the out-of-state "sale" but the buyer's "use" of the goods within Illinois—but it is generally set at a rate equal to the "sales tax" rate for in-state sales, and it functions as a sales tax equivalent.
Nothing in Quill interferes with the state's ability to impose those use taxes on its taxpayers, and most States continue to do so. But it does prohibit States from doing, in the context of "use tax" collection, what it does for "sales tax" collection, viz., requiring the sellers to collect the tax that is owed by the buyer and to remit the proceeds to Illinois—unless the seller maintains some "physical presence" in Illinois.
Quill is why most online retailers will, at checkout, say something like "Sales tax will be aded for sales to PA, NY, and IN"—places where, presumably, the seller does have a physical presence—"but not elsewhere."
The Quill Court rested its finding that taxing out-of-state sales is unconstitutional on the so-called "negative" or "dormant" Commerce Clause.
Now, the dormant Commerce Clause is one of those legal doctrines that most lawyers, I bet, still recall from Con Law I—and not at all fondly, finding it either entirely contrary to common sense and/or downright incomprehensible. For me, though, it was love at first sight (h/t to my Con Law I prof, Louis Michael Seidman, who gave us a really superlative introduction to the doctrine's many delights), and, love being blind, I've always managed to overlook and forgive the doctine's many flaws.
It's a truly stunning act of judicial creativity, crafted over several centuries of work. Here's the gist of it. In the Commerce Clause (Article I sec. 8), the Constitution gives Congress the power to "regulate Commerce … among the several States." The Court has, beginning in the early 19th century, found in this affirmative grant a power a corresponding negative, a prohibition on the exercise State power. Congress' power, in effect, is converted into an exclusive power to "regulate interstate commerce," and States may not exercise that power or interfere with Congress' excercise of it by "imposing excessive burdens on interstate commerce without congressional approval."
The Court has identified two primary categories of State actions that unconstitutionally burden interstate economic activity. First, States may not impose regulations that discriminate against out-of-State entities for the benefit of in-state entities—always a temptation for State law-makers. And second, they may not impose regulations that, while non-discriminatory, "unduly burden" interstate commerce by "subjecting it to haphazard, uncoordinated, and possibly inconsistent regulation" by States, a "welter of inconsistent and burdensome taxation and regulatory requirements" in areas of commerce that "by their nature demand cohesive national treatment."
It was this latter problem—the potential welter of burdensome taxes and regulations—that, in the Quill Court's view, doomed North Dakota's (and, by extension, any other State's) efforts to impose its tax across State lines:
North Dakota's use tax illustrates well how a state tax might unduly burden interstate commerce. North Dakota law imposes a collection duty on every vendor who advertises in the State three times in a single year. Thus, … a publisher who included a subscription card in three issues of its magazine, a vendor whose radio advertisements were heard in North Dakota on three occasions, and a corporation whose telephone sales force made three calls into the State, all would be subject to the collection duty. What is more significant, similar obligations might be imposed by the Nation's 6,000-plus taxing jurisdictions… [The] many variations in rates of tax, in allowable exemptions, and in administrative and record-keeping requirements could entangle a mail-order house in a virtual welter of complicated obligations.
Many people have complained about the Quill rule, vociferously, over the years, and the South Dakota statute now at issue in the Wayfair case—which provides that "sellers of tangible personal property in South Dakota without a physical presence in the state … shall remit sales tax according to the same procedures as sellers with a physical presence"—was clearly designed to give the Court an opportunity to reconsider and overrule it, which opportunity the Court, in its cert grant, has now apparently seized.
Complaints about the Quill certainly have considerable force. Quill allows an online retailer, operating out of her garage in State X, to sell goods to buyers in all other States without charging any sales or use tax, which puts local brick-and-mortar stores in X, who have to charge X's tax to all buyers, at a serious competitive disadvantage. This, many people persuasively contend, is both economically inefficient and has helped to destroy (or at least weaken substantially) those traditional brick-and-mortar retail outlets, with dire consequences for both the health of local retailing and for the state of America's cities and towns. A number of serious heavyweights have weighed in on the question via amicus briefs supporting South Dakota in the Wayfair case—from the National Federation of Retail Businesses to the American Booksellers Association to the American Farm Bureau to the National Governors' Association to the Attorneys General of 34 States.
But I think Quill got it right. The risk of strangling Internet commerce in a morass of complex and inconsistent obligations—6,000 plus taxing jurisdictions! – makes this precisely the sort of question that demands "cohesive national treatment" of the kind that only Congress can provide.
Of all the amicus briefs (available at Scotusblog), I found one submitted by Chris Cox, the former Republican Representative in Congress from California (and co-author, with then-Rep Ron Wyden (D-OR), of the "Internet Tax Freedom Act" of 1998) to be the most persuasive of all. He put the central issue this way:
A woman opens a small business out of her apartment in Idaho, selling iPhone cases principally over the internet … via her own web storefront. Her customers are mostly in the United States and Canada. In a typical week she fills orders primarily to New York, Florida, Texas, Illinois, Colorado, and California, with gross annual sales of $273,000. She rarely sells to customers in South Dakota—maybe four iPhone cases in an entire week. …
Because she lives and works in Idaho, she is registered with the Idaho State Tax Commission, the Idaho Department of Labor, and the Idaho Industrial Commission. She has paid the Idaho State Tax Commission for a seller's permit, and regularly files Idaho sales tax returns. Compliance with Idaho's rules requires her, like other businesses in Idaho, to be familiar with the State's varying tax rates and definitions of what is taxable, its audit and recordkeeping requirements, and its filing requirements (in her case, the requirement to file monthly sales tax reports).
South Dakota's law, however, does not merely require her to collect South Dakota's sales tax; it subjects her to the full range of South Dakota's tax and regulatory jurisdiction, including the panoply of South Dakota's licensing, recordkeeping, and registration requirements, and would, among other things, make her subject to periodic audit by the South Dakota Department of Revenue—which, in many States, requires an in-person appearance before the Revenue Board.
And of course if the Court discards the Quill rule and upholds South Dakota's law, we can expect other jurisdictions to follow suit.
South Dakota approvingly reports that "many other States have enacted provisions materially identical to South Dakota's," meaning that if this Court upholds the contested law in this case, even the smallest Internet sellers will quickly be subject to nationwide compliance burdens and the competing rules, filing requirements and audit demands of [thousands of] taxing jurisdictions.
This is precisely the sort of regulatory morass the dormant Commerce Clause was designed to prevent. It is yet another illustration of the central problem we face in applying legal rules to Internet communication. As Cox puts it, "the Internet's decentralized, packet-switched architecture," through which every individual website is "immediately and uninterruptedly exposed to billions of Internet users in every U.S. jurisdiction and around the planet," makes Internet commerce "uniquely vulnerable to tax and regulatory burdens in thousands of jurisdictions." Internet content is available to everyone, everywhere, simultaneously; that, however, cannot mean that it is thereby subject to the obligations imposed by all legal regimes, everywhere, simultaneously, because such a scheme is unworkable and incoherent.
Notice, too, that while South Dakota and its supporters argue that the Quill rule discriminates in favor of online retailers at the expense of local brick-and-mortar stores, abrogating the rule will have substantial discriminatory consequences in the opposite direction.
Consider again that Idaho seller of iphone cases. The moment she opens up her Internet storefront, she is subjecting herself to this burden of complying not only with Idaho's regulatory and tax authorities, but with the regulatory and tax authorities in whatever jurisdictions her electrons may enter, i.e., all of them. But her brick-and-mortar counterpart, who sells iphone cases over the counter in Idaho to customers in-store, has no such burden; even if he sells to Floridians or Californians passing through Idaho, his store only has to comply with Idaho's regulatory and tax apparatus. In Cox's words, "forcing one small business, with one location, to bear this burden is discriminatory when a large in-state retailer has no such burden."
There is a solution to this problem—and it is a fairly simple one at that. The dormant Commerce Clause disables States from acting because Congress has the responsibilty for solving problems like this. If the current status quo unfairly discriminates against brick-and-mortar retailers, a federal statute could require all retailers—online and off—to take X% of all sales and to remit that to a fund, administered by the federal government, from which payments will be made to the States based on their particular rates and the location of the transaction. Figuring out what X should be—presumably, some kind of weighted average of all current State sales taxes—and how the payment allocation formula will operate, are not trivial questions. But they're hardly intractable. It would operate, as far as consumers are concerned, as a national sales tax, though it would in reality be just a collection mechanism for State taxes.
It would require, yes, a functional Congress, and that's not what we seem to have these days. But it—or something like it, administered and authorized at the national level by our national institutions—is clearly the right answer to the problem, and if Congress weren't so, um, pre-occupied with other issues there might be a path forward to actually addressing this problem in a sensible and coherent manner. No, I'm not holding my breath—just hoping that the Court doesn't unleash the taxing hounds to go out and tear up the Net.
The post Supreme Court Takes Up Internet Sales Tax Conundrum appeared first on Reason.com.
]]>In 2014, U.S. sales on the Internet amounted to an estimated $305 billion. While still small in comparison to the $4.7 trillion in overall domestic sales, the online component grew 15 percent over the previous year, sending terror into the hearts not only of brick-and-mortar competitors, but of state legislators desperate to get their hands on sales-tax revenue.
Now the two groups are lobbying Congress to let state governments require businesses to collect sales taxes on out-of-state purchases made online. But they should be careful what they wish for: A bill on the subject is making headway on Capitol Hill, and it's not quite what the two lobbies wanted.
House Judiciary Chairman Bob Goodlatte (R-Va.) is circulating legislation—the Online Sales Simplification Act of 2015—that would make it easier for states to tax online purchases, while also limiting the states' power by allowing for something known as an "origin-based" sales tax. States would tax Internet sales based on the seller's location rather than the buyer's, the opposite of what sales tax expansionists have been pining for.
Under the bill, a California shopper who buys a product online from a vendor in Virginia would be taxed at Virginia's rate of 5.63 percent rather than California's rate of 8.41 percent. (Where local sales taxes exist, these would also apply.) Sellers with outlets in multiple states would collect taxes for the state where they have their largest presence.
The main benefit of an origin-based tax is that it encourages competition between the states, giving governments an incentive to limit their sales tax rates in order to attract and keep businesses. Such a system also allows consumers in high-tax states to escape the burden by buying from sellers in low-rate states. And because it allows taxes only on businesses within the taxers' jurisdictions, an origin-based tax is in line with constitutional protections for interstate commerce.
"Finally, someone in Congress has drafted an approach to the Internet sales tax issue that doesn't empower bureaucrats to tax across state lines and saddle Web-based retailers with enormous complexity," says Andrew Moylan, executive director of the pro-market R Street Institute. Moylan was alluding to the Marketplace Fairness Act, the states' preferred alternative to Goodlatte's bill. The act, which passed the Senate in 2013 but died in the House, would have allowed states to levy sales taxes based on buyers' locations.
As Moylan notes, that "would force online sellers to comply with the tax rules of as many as 9,998 different taxing jurisdictions nationwide, imposing huge compliance burdens and opening them up to audits from all 46 states with statewide sales taxes." It would also destroy tax competition by giving "state-level 'IRS' agents the unprecedented power to enforce their tax obligations on businesses all across the country even if [the businesses] lack a physical presence within [the agents'] jurisdiction."
Thanks to a 1992 Supreme Court decision (Quill v. North Dakota), a business must have a significant presence in a state before that state can require it to collect sales taxes. The online retailer Amazon must collect taxes from customers in 24 states, because its vast distribution network touches so many places. But most online retailers do not have Amazon's far-flung physical presence.
Many cash-hungry state governments have passed "affiliate nexus" laws, which redefine the concept of "significant presence" in absurd ways—stretching it, for example, so that it includes a blogger in the same state as the buyer who posts a link to an out-of-state vendor. This has led to a series of legal challenges, but the courts have so far encouraged states to continue pursuing such cash-grabbing schemes.
Even if state governments get their way and are able to require out-of-state sellers to collect taxes for them, that won't solve their budget problems. According to data from the Henry J. Kaiser Family Foundation, the states had a combined budget gap of $55 billion in fiscal year 2013. The main academic study that brick-and-mortar retailers cite to show how much money the government is leaving on the table comes from the University of Tennessee business professor William Fox, who estimates that $11.4 billion in annual sales taxes are going uncollected. And even that number is wildly exaggerated-a more realistic estimate was produced by Jeff Eisenach of the American Enterprise Institute and Robert Litan of the Brookings Institution, who put uncollected e-commerce sales taxes at just $3.9 billion in 2008. Were states able to collect every penny of that amount, it would still barely dent their cumulative shortfall.
Although the Goodlatte bill would help put a stop to the trend of state revenue authorities attempting to impose taxes on out-of-state entities, it's still a far cry from pure origin-based taxation. In an ideal scenario, all sales by businesses in California would pay sales taxes at California's 8.41 percent rate, regardless of the location of the buyer. The ravenous desire for more overall revenue, plus the secondary benefits of having companies based in the Golden State (jobs, for instance) would push Sacramento to consider lowering tax rates—driven by the kind of tax competition that benefits customers.
The discussion draft of the Goodlatte legislation offers a more complicated scenario: Virginia might offer a low sales tax with the hope of attracting companies to locate within its borders, and buyers from companies based in the Old Dominion would pay at the Virginia rate. But if the two states are part of the same tax clearinghouse then low-tax Virginia would be required to send the money collected from California buyers in Virginia to high-tax California through the clearinghouse. That means states would still receive money collected where they have no jurisdiction.
This is not as mechanically problematic as a destination-based tax, since the sellers need only collect sales taxes at one rate—that of the state where they are based. But it still gets in the way of the tax competition benefits of a true origin-based tax by diminishing the incentive for states to attract more businesses by maintaining or pursuing lower rates. If a high-tax state will still get some revenue collected from out-of-state sales, they have less reason to lower their rates.
Mitigating this problem from a customer's point of view is that the incentive remains to buy from sellers in low-rate states. And as R Street's Moylan notes, "cutting checks by formula" is one of the few things the government is good at.
The much bigger drawback is that Goodlatte's bill would impose taxes on customers buying from businesses in states that do not have a sales tax at all, such as Delaware and Oregon. A business in any of those states would be required to collect taxes from out-of-state buyers using the lowest combined state and local rate in the country. (At the moment, Wyoming takes that prize with a combined sales tax rate of 5.49 percent.) This provision, which is likely intended to grab more revenue, defeats the point of having an origin-based tax, since it forces certain businesses to collect taxes when they otherwise would not have to.
"The proposal would be improved substantially," Moylan says, "if it better protected sellers in non-sales-tax states (perhaps by allowing them to opt out of any collection scheme)." He also suggests other changes, such as passing legislation to impede the silly abuses allowed by affiliate nexus laws. But ultimately, Moylan thinks a version of Goodlatte's proposal would be "an enormous victory for the cause of sanity in taxation. It would solve the Internet sales tax debacle without imposing a cure worse than the disease and it would help reestablish borders as limits to tax state tax power."
If the goal is to wring as much tax revenue out of consumers as possible, this plan is not the answer. But as a way of making e-commerce taxes both fairer and more straightforward, we could do a lot worse.
The post The Online Sales Tax Cash Grab appeared first on Reason.com.
]]>Well, this is encouraging.
A bill granting states the ability to force out-of-state websites to collect Internet sales tax is dead, according to the Ohio Republican's spokesman.
"The speaker has made clear in the past he has significant concerns about the bill, and it won't move forward this year," said spokesman Kevin Smith. "The Judiciary Committee continues to examine the measure and the broader issue. In the meantime, the House and Senate should work together to extend the moratorium on internet taxation without further delay."
A bipartisan group passed the Marketplace Fairness Act out of the Senate last year on a 69-27 vote, led by Sens. Richard J. Durbin, D-Ill., and Michael B. Enzi, R-Wyo., but it has languished in the House.
Hat Tip: Generation Opportunity.
As it stands, internet retailers generally don't collect sales tax on purchases sent to states in which the retailer has no physical presence. So, for instance, my Amazon purchases sent to my home in Ohio are gloriously cheaper than ones sent to 23 other states.
It's a certainty that at some point internet retailers will be forced to collect state and local sales taxes on all sales, regardless of physical presence. That's partly because lawmakers will eventually demand it—there's just too much untaxed money out there and expecting pols not to pounce on it is like expecting a dog to ignore a pile of hamburger meat that's right under its snoot. It's also partily because giant retailers such as Walmart will demand it in the name of a "level playing field" between bricks-and-mortar ops and mail-order companies. Indeed, after many years of opposing levying of sales tax on all purchases, even Amazon has been playing along, partly because it can absorb the extra costs more efficiently than smaller online retailers.
There are strong arguments against forcing internet retailers from collecting such taxes (see below), but realpolitik being what it is, good luck with prevailing due to logic and fairness. A very good solution would be to have retailers collect the sales tax due in their home jurisdiction rather than what might be due in the purchaser's. That approach would foster tax competition while simplifying compliance costs.
Here's a 2009 interview with Patrick Byrne, the CEO and founder of Overstock.com, who remains the most vocal and principled opponent of internet sales tax legislation. The whole 10-minute interview is worth a listen (Byrne did a Ph.D dissertation at Stanford on Robert Nozick's libertarian philosophy), but the sales tax talk starts at 1.10 minutes:
The post Internet Sales Tax Won't Happen in Lame-Duck Session, But Should It Ever? appeared first on Reason.com.
]]>Despite difficulties presented by federal law, many states have recently instituted sales taxes on online purchases from out-of-state vendors. A study of the results of the so-called Amazon tax-referring to the online retailer most affected-as it operates in five states (California, Virginia, Texas, New Jersey, and Pennsylvania) found that it discouraged consumers from buying through Amazon.
The study was issued by the National Bureau of Economic Research, and was conducted by Brian Baugh, Hoonsuk Park, and Itzhak Ben-David, all of Ohio State University. The taxes, which went into effect in 2012 and 2013 across those states "resulted in a large decline across all states of 9.5 percent in the value of products (net of sales tax) purchased on Amazon." The authors concluded that this effect was not attributable to people upping their Amazon purchases just before the tax went into effect.
"Most of the gains in 'leveling the playing field' are garnered by the online operations of retailers" rather than brick and mortar stores, who often complained they were being outcompeted by Amazon. The study found a 19.8 percent increase in "purchases at the online operations of competing retailers" (who already had some physical nexus in the states, and thus had already been paying sales tax, so the "Amazon tax" eliminated an Amazon price advantage), but only a 2 percent "increase in local brick-and-mortar expenditures" at that same set of retailers.
The post Amazon Tax Blues appeared first on Reason.com.
]]>In the latest development, a federal appeals court ruled that a lower court overstepped its jurisdiction in tossing out the law last year.
The law, passed in 2010, imposes extensive reporting requirements on e-tailers that don't collect Colorado's 2.9 percent use tax on purchases.
The law was intended to urge non-collecting retailers to start charging the tax.
The post CO Wins a Round as Court Rules for Internet Sales Tax appeared first on Reason.com.
]]>Renowned economist Arthur Laffer argued in a study, to be released Thursday, that taxing online purchases would stimulate growth and create more than 1.5 million jobs over the next 10 years.
The post Art Laffer Comes Out in Favor of Online Sales Tax appeared first on Reason.com.
]]>July 1 is the beginning of the fiscal year in most states, and the preferred start date for new or updated taxes. This year, legislatures changed tax rates on significant parts of the economy, including gasoline or fuel levies, sales taxes and property taxes.
Perhaps the most innovative new taxes are in cyberspace. Minnesota is leading the way in moving the taxman into Internet sales, by imposing taxes on digital audio works like songs, readings of books, speeches, ring tones or other sound recordings. The 6.875 percent sales tax does not apply to "ring back" tones or music that is played while a caller is on hold.
The post July Brings a Flurry of New State Internet Taxes appeared first on Reason.com.
]]>House Judiciary Committee Chairman Bob Goodlatte (R-Va.) says his committee will not take up the Senate-approved Marketplace Fairness Act, which would let states require online merchants to collect sales tax. According to Generation Opportunity, an activist group that campaigned against the legislation, "Goodlatte's statement effectively kills the bill." WSLS, the NBC affiliate in Roanoke, describes the congressman's position this way:
Goodlatte said the bill is unfair to consumers since they would have to pay more.
"Transactions on the Internet are going to increase," the Republican congressman said. "It's obviously something where we want to make sure that the many, many businesses in this community who do business online and you don't see them because they don't have storefronts are treated fairly."
Goodlatte said the states should reach an agreement so Congress doesn't have to get involved. He said House Republicans will work on their own version of the bill that protects consumers.
I criticized the sales tax bill and suggested a better approach in a column last month.
The post Internet Sales Tax Bill Looks Dead appeared first on Reason.com.
]]>Some have drawn that conclusion from after the U.S. Senate OK'd of the Marketplace Fairness Act earlier this week. The bill — if it becomes law — would allow states to collect sales taxes from online transactions, even if the companies conducting the transaction are located outside the borders of the state.
"States and local governments want more money, and with this bill they'd get it. Huge online and traditional retailers like Amazon and Walmart want even more advantages over smaller competitors. With this bill, they'd get those additional advantages," said Steve Stanek, a research fellow for the Heartland Institute, a free-market think tank based in Chicago.
The post Internet Sales Tax Bill Allies Government and Big Business appeared first on Reason.com.
]]>Freshman GOP Sen. Ted Cruz, for instance, is among those arguing the bill is effectively a tax increase on consumers.
"How is it fair for a Texas business to collect taxes to support California Gov. Jerry Brown's big spending? Or to underwrite New York City Mayor Michael Bloomberg's nanny statism or Chicago Mayor Rahm Emanuel's anti-Second Amendment agenda?" Cruz said in a Sunday opinion piece at Real Clear Politics.
The post Ted Cruz: Internet Sales Tax Means Underwriting Local Nanny Statism appeared first on Reason.com.
]]>The Senate voted 69 to 27 Monday to pass the bill, sending it to the House where it faces opposition from some lawmakers who regard it as a tax increase.
The bill would empower states to require businesses with more than $1 million in out-of-state sales to collect taxes for products they sell on the Internet, in catalogs and through radio and TV ads. Under the legislation, the sales taxes would be sent to the states where a shopper lives.
The post Senate Passes Internet Sales Tax Bill appeared first on Reason.com.
]]>The Senate is expected to vote as early as Monday on the long-debated issue of an Internet sales tax. The bill being considered in Washington now would require online outlets with sales of at least $1 million to collect sales tax in all states, even those in which they don't have a store, warehouse or other physical operations. Today those taxes don't have to be collected by e-retailers in states they don't set (flesh or robot) foot in.
The post Senate To Vote on Internet Sales Tax Measure appeared first on Reason.com.
]]>The post Friday Funnies: Internet Sales Tax appeared first on Reason.com.
]]>Last year Paul Misener, Amazon's vice president for global public policy, testified in favor of a bill allowing states to demand sales tax from online merchants, saying Congress should "level the playing field for all sellers." As that switcheroo suggests, there are plausible fairness arguments on both sides of this issue. And although there is a way to bridge the gap, it is not the route Congress seems intent on taking.
The Marketplace Fairness Act, which Congress is expected to approve soon, sounds like something out of an Ayn Rand novel. But it reflects understandable complaints from brick-and-mortar retailers who believe their online competitors have been enjoying an unfair advantage for way too long, thanks to Supreme Court rulings that bar a state from requiring a business to collect sales tax unless the company has a physical presence in that state.
Shoppers are still legally obligated to pay their state's sales tax on items they buy online, but few are aware of this notional requirement and even fewer comply with it. The upshot is that online sales are effectively tax-free, unless you happen to live in the same state where the merchant is located.
At the average combined state and local tax rate, the savings amount to about $9 on a $100 purchase. That's not a huge difference, but it helps online merchants (and hurts their offline competitors) to the extent that it makes people care less about shipping charges.
At the same time, companies with customers throughout the country are understandably worried about complying with the multifarious demands of the 9,000 or so jurisdictions that have the authority to impose sales taxes. That burden is less daunting to big companies like Amazon (which might even be said to enjoy an unfair advantage in that respect) than to their smaller competitors. In partial recognition of that reality, the Marketplace Fairness Act exempts merchants with less than $1 million in annual out-of-state revenue.
The bill seeks to reduce the compliance burden by requiring each state to offer free software allowing merchants to calculate sales tax and file a single return for all taxing authorities within the state. States could not audit a business more than once a year.
Still, that's 46 returns (45 states with sales taxes plus the District of Columbia), which have to be filed monthly or quarterly, and 46 potential audits every year, not to mention all the misunderstandings, disputes, and hassles that fall short of an audit. You can start to see why the Supreme Court deemed collection of sales taxes from remote vendors an unconstitutional burden on interstate commerce.
But the Court also said Congress, under its power to regulate interstate commerce, could authorize such tax collection, which is what it is poised to do. Unfortunately, it has overlooked a simpler, fairer, and smarter way of letting states get the revenue they crave.
In a 2011 paper published by the Mercatus Center at George Mason University, Veronique de Rugy and Adam Thierer recommended "an 'origin-based' sourcing rule for any states seeking to impose sales tax collection obligations on interstate vendors." Under that rule, which mirrors what happens when you buy something while visiting another state, each business collects sales tax on behalf of the state where it is based, no matter where the customer happens to be.
The beauty of this approach is that it treats all retailers equally, eliminates the daunting challenge of dealing with many different taxing authorities, and respects state policy choices while encouraging tax competition between jurisdictions. Evidently the idea makes too much sense for Congress to consider.
The post Are Online Sales Taxes Only Fair? appeared first on Reason.com.
]]>Big-box retailers and state governments showed last month that they command wide backing for the levy. Now, opponents are emphasizing the potential flaws in the legislation as they try to peel away that support.
"This bill is bad for business and bad for jobs," said Senator Max Baucus, a Montana Democrat and chairman of the Senate Finance Committee, who said the measure wasn't ready to debate yet. "It is full of unintended consequences."
The post Coalition Fights Uphill Battle Against Internet Sales Taxes appeared first on Reason.com.
]]>Yesterday, the Senate voted overwhelmingly to allow a vote on The Marketplace Fairness Act, which would allow states to start forcing online retailers with no physical presence in their states to collect sales tax. The vote will happen this week and the bill will likely pass the upper chamber. Estimates suggest some $11 billion is currently escaping the clutches of state and local tax collectors, so we're talking about real cash here.
As the indispensable Declan McCullagh of CNET reports, this effort caps
years of lobbying by the National Retail Federation and the Retail Industry Leaders Association, which represent big box stores including including Walmart, Target, AutoZone, Best Buy, Home Depot, OfficeMax, Macy's, and the Container Store. President Obama also supports the bill, his spokesman said Monday.
As telling, McCullagh notes that the current legislation—which would force all online retailers to comply with variations among the nearly 10,000 tax jurisdictions in the country—is totally different from earlier attempts to apply simplified taxes to online sales.
Eight years ago, Sens. Mike Enzi, R-Wyo., and Byron Dorgan, D-N.D., introduced legislation that would have allowed Internet sales taxes to be collected—but only after states simplified and standardized their tax systems through a process created in 2000. Enzi said at the time that it was necessary to require "dramatic simplification in almost every aspect of sales and use tax collection and administration" including "a reduced number of sales tax rates" and "reduced audit burdens for sellers."
The current version of S.743, however, lacks those protections. Small sellers with no profits could be subject to audits in dozens of states. Each of the nearly 10,000 local tax jurisdictions could specify a different tax rate. Businesses would also have to figure out how to handle the complexity of integrating as many as 46 state government-supplied software packages into Web ordering systems.
Enzi is in favor of the new bill, as is Amazon (which has already cut deals with various states in which it has a physical presence). The sense is that the massive online retailer can easily handle administrative costs that are a burden to smaller comptetitors.
Apparent from the current bill's lack of simplification, there is a superficial case for treating retailers similarly. Though let's not skip over the maze of state and local anomalies. As McCullagh notes,
In New Jersey, for instance, bottled water and cookies are exempt from sales tax, but bottled soda and candy are taxable. In Rhode Island, buying a mink handbag is taxed, but a mink fur coat is not.
But beyond the superficial case for "equal" treatment, there are real questions about fairness. Back in 2009, Overstock CEO Patrick Byrne talked about this with Reason TV. Internet retailers, he argued, "put a lot lesser load on a local infrastructure than it does to build a Target." That includes not only roads and sewers, but also schools and other buildings that serve employees' kids and the like. And we might add that just as online retailers gain an edge by not charging sales tax, bricks-and-mortars retailers have the edge in immediacy, display space, and other things customers like. Best Buy and Borders (which screwed up its web store for years) didn't come close to going belly up simply because everybody started buying shit online (though such competition was a factor).
Reason columnist Veronique de Rugy and her Mercatus Center colleague Adam Thierer have also noted that The Marketplace Fairness Act is premised on the idea that "the the government should be able to collect the maximum amount of tax revenue from citizens, and that consumers should not be able to decide where to shop based on tax levels." They actually present a different way of thinking about the sales tax issue that deserves more attention.
Tax competition is a good and healthy thing, as it helps to spur innovation in both the public and private sectors and enhances various "experiments in living" different jurisdictions and communities want to pursue. Residents benefit from being able to choose among different attitudes toward the level of taxation and (one presumes) the level of public services they pay for.
De Rugy and Thierer suggest that taxing goods and services at the point of origin rather than the point of definition is an easy way to keep tax competition thriving. Instead of taxing online sales based on where the customer lives, tax the purchase where the vendor is. That would not only simplify the vendor's calculations (he/she would only need to know one tax code), it would allow for exactly the sort of competition that helped create differential jurisdictions in the past that helped nurture catalog sales and online retail.
The good news for those opposed to the Senate plan? The House is unlikely to pass similar legislation.
Watch Patrick Byrne (who holds a Stanford Ph.D. in philosophy) talk taxes, short-selling, and Robert Nozick:
The post Senate Poised to Pass Internet Sales Tax Bill, Kill Healthy Competition appeared first on Reason.com.
]]>Several developments in recent weeks show how quickly the landscape is changing on what has long been an important but elusive goal for state officials: collecting sales tax from online retailers.
States and localities could reap as much as $11 billion a year, according to one study. Internet shoppers are already supposed to pay the money on their own but rarely do.
The post States Closer To Squeezing Consumers for Online Sales Taxes appeared first on Reason.com.
]]>Along with New York, eight other states have similar laws on the books ending the hidden tax break people got when buying products from companies on the Internet. Those statutes require the states in question to collect sales tax from out-of-state retailers when they had branch offices or affiliates, even when they didn't have a physical state presence.
The post New York Court Rules Online Vendors Must Collect Sales Taxes appeared first on Reason.com.
]]>Everybody's neighborhood big-box retailer sees itself as a victim of technological innovation and an inequitable tax system that plays favorites – at least online.
With scary Internet competitors such as eBay and madeinwisconsin.com, Walmart just can't get a fair shake – that is, according to the mammoth retail chain and its big-box brethren lobbying for the Marketplace Fairness Act.
The bill, passed by nonbinding resolution last week by the U.S. Senate, would allow states to force Internet retailers to collect sales taxes from customers who reside in other states.
The post Big Retailers Back Internet Sales Taxes appeared first on Reason.com.
]]>Utah's legislature recently considering a bill to implement an online sales tax, which failed earlier this month. Proponents, including brick and mortar stores, lobbied for the bill to "level the playing field" by requiring online sellers to collect the same sales tax stores in the real world do. Author Connor Boyack makes the libertarian case against internet sales taxes and government marriage:
Retail stores are required by the state to become tax collectors, and online stores with no physical presence in the state are not. Should the state then increase its size, reach, and tax base in the name of fairness?
Absolutely not. Equality before and non-discrimination by the law is important, to be sure. But increasing the size and scope of the state is not the proper method to fulfill that objective. As is usually the case, the opposite is true; reducing and ultimately removing the other barrier is best. Because sales taxes are an illegitimate imposition into a private commercial transaction, political pressure should be applied to repeal that mandate from existing establishments, rather than shackling those that are currently exempt.
The same situation exists in the debate over same-sex marriage. Proponents of altering marriage law in the states and at the federal level claim that prohibitions against gay marriage are unfair and discriminatory. They claim that equality before the law demands that their relationships likewise be licensed and sanctioned by the state.
As with sales taxes, the state should not be enlarged in pursuit of equality in marriage licensure. Because the government has no business being involved in marriage, the discrimination inherent in existing marriage law is best remedied by removing it altogether, or at least reducing the inequality by removing tax credits, estate planning benefits, and other incentives currently restricted to heterosexual couples whose unions are licensed by the state.
Read the rest of the piece here.
The post What Internet Sales Tax and Gay Marriage Have in Common appeared first on Reason.com.
]]>You've almost certainly never heard of George Skelton, but he has been the main California-politics columnist for the Golden State's largest newspaper for the last two decades, and he covered politics for the L.A. Times (in both Sacramento and Washington, D.C.) for the two decades before that. You can plausibly use him as a stand-in for the basic political values commonly found in our nation's leading newsrooms.
And George Skelton not only wants to tax your email, he thinks proposing a tax on your email marks the height of political courage. Stand back, people, it's newspaperin' time!
The most courageous politician in California — probably the nation — is a Berkeley city councilman, Gordon Wozniak. His gutsy act: proposing that the government tax email.
Wozniak, 59, suggested taxing email during a recent council meeting as the city went on record opposing the sale of the Berkeley main post office and urging the Postal Service to maintain all its services there. […]
An email tax — as part of a broader Internet tax — could raise money to help keep the Postal Service afloat, Wozniak told the council.
"There should be something like a bit tax," he said. "I mean, a bit tax could be a cent per gigabit and they would make, probably, billions of dollars a year…. And there should be, also, a very tiny tax on email."
I don't know about taxing gigabits. I'm not even sure what they are.
But email I'm as familiar with as a nagging toothache. I spend way too much of my day, as do many workers who depend on computers, hitting the delete key or — even more time-consuming — routing spam into the junk file and trying to block out the arrogant sender forever. […]
So leave me alone. And stop clogging my inbox.
Or how about you leave me alone, George Skelton, by not taking my money in the name of keeping open money-losing post offices?
Read the whole column for such columnar brain-fartery as "I'd allow everyone a certain number of untaxed, private emails a month — 100, maybe 200. After that, each message would cost one cent, up to a certain size." Hat tip to Michael C. Moynihan.
Reason's past George Skelton archive.
The post What 'courage' Looks Like to a Big-Time Newspaper Columnist: Taxing Email appeared first on Reason.com.
]]>By a vote of 75 to 24, senators adopted an amendment to a Democratic budget resolution that, by allowing states to "collect taxes on remote sales," is intended to eventually usher in the first national Internet sales tax.
The vote follows a week of fierce lobbying from the National Retail Federation and the Retail Industry Leaders Association, which represent companies including Walmart, Target, AutoZone, Best Buy, Home Depot, OfficeMax, Macy's, and the Container Store. They argue that online retailers, which in some cases do not collect sales taxes at checkout, enjoy an unfair competitive advantage over big box stores that do.
The post Senate Endorses Internet Sales Taxes appeared first on Reason.com.
]]>Sens. Mike Enzi (R-Wy.) and Dick Durbin (D-Ill.) are expected to offer an amendment to a Democratic budget resolution this week that, by allowing states to "collect taxes on remote sales," is intended to usher in the first national Internet sales tax.
"We're working overtime in pushing this, talking to our members, activating our grassroots," says Stephen Schatz, a spokesman for the National Retail Federation. The group's board members include OfficeMax, Macy's, the Container Store, and Saks, which argue it's only fair to force Americans to pay sales taxes when buying from online retailers.
The post Senate To Vote on Internet Sales Tax appeared first on Reason.com.
]]>Still and all, any debate is a good debate, and I thank Thom Hartmann for having me on.
Reason columnist Veronique de Rugy has dealt, at length, with the subject of Internet sales taxes.
The post J.D. Tuccille Debates Thom Hartmann Over Internet Sales Taxes appeared first on Reason.com.
]]>In a case being heard by the State of New York Court of Appeals, attorneys for both retailers claimed yesterday that a 2008 New York law requiring them to collect sales tax on online purchases is unconstitutional, as reported by Reuters.
A 1992 Supreme Court decision found that retailers can't be forced to collect sales tax on out-of-state purchases unless they have a physical presence in those states. But the New York law skirted that decision. The state concluded that New York-based entities that "directly or indirectly refer customers" to a retailer's Web site represent a sales presence in the state, requiring that taxes be collected.
The post NY Internet Sales Tax Challenged by Amazon, Overstock appeared first on Reason.com.
]]>Passed in 1998, the Internet Tax Freedom Act prevents federal, state, and local governments from collecting sales taxes on the use of e-mail and other types of Internet access. The bill is due to expire November of next year.
New legislation introduced yesterday by Republican Sens. Kelly Ayotte (N.H.) and Dean Heller (Nev.) is designed to extend the ban indefinitely. The Permanent Internet Tax Freedom Act would stop governments from imposing new taxes on Internet access.
"Nevadans and every American should be able to access the Internet without penalties from the federal government," Heller said in a statement. "The Internet Tax Freedom Act will ensure a long-standing federal policy that prevents the government from raising taxes, and preserves the Internet as a tool for education and innovation."
The post Senators Push Permanent Ban on Internet Access Tax appeared first on Reason.com.
]]>Come 2013, the Sunshine State could find itself with an Internet sales tax, thanks to a bill put forward by state Sen. Gwen Margolis, D-Miami, on Monday.
Margolis did not return calls to Florida Watchdog, but she told Jacksonville News 4 that the idea of the tax rests on imposing fairness for Florida's businesses.
The post FL Targets Internet With New Sales Tax appeared first on Reason.com.
]]>It will lobby on issues such as allocation of visas for engineers and matters of privacy and piracy, said the group's president Michael Beckerman, a former advisor to Fred Upton, the chairman of the U.S. House of Representatives' Energy and Commerce Committee.
Other members include Expedia, LinkedIn, Monster Worldwide, Yahoo! and Zynga.
The post Internet Heavy-Hitters Start Lobbying Group appeared first on Reason.com.
]]>But Amazon will continue to not collect taxes on hundreds of thousands of items that it lists for sale on its Web site, stores in its warehouses, and packages for quick shipment to California residents.
Those orders—called "fulfilled" by Amazon—amount to a tax loophole that has left Sacramento tax collectors a tad unhappy. California sales tax rates are among the highest in the country, topping out at 9.75 percent, meaning the apparent tax savings can add up quickly.
The post Many Amazon Customers Will Escape CA Sales Tax appeared first on Reason.com.
]]>The goal: $950,000. Instead, when the campaign ended August 8, so many gamers and game developers had pledged $99 (or more) to get the new Android-based Ouya that the company raised $8.6 million, making it one of the biggest crowdfunding success stories ever.
"We've been in the public consciousness for only 30 days, and we sold over 60,000 boxes," Uhrman says. "There's a good audience (on Kickstarter) for the product we're trying to build, and it allowed us to move very quickly."
But one important thing has been overlooked: taxes.
The post Crowdfunding Your Business Venture? Prepare for Taxes appeared first on Reason.com.
]]>Online sales taxes have been a battlefield for lobbying titans for years, pitting Walmart and the rest of the brick-and-mortar retail lobby against Amazon and other online retailers. But now Amazon has changed its business model and also its lobbying position, joining the rest of the retail giants in calling on Congress to aid states in collecting sales tax from online sales.
The post Amazon Joins Walmart in Online Sales Tax Push appeared first on Reason.com.
]]>Following a pattern on displays in states such as Texas and South Carolina, e-commerce giant Amazon has agreed to start collecting state sales tax in Indiana in two years' time, reports the Washington Post (full disclosure: Amazon founder Jeff Bezos is a donor to Reason Foundation, the nonprofit that publishes this website).Counties and localities that tack on increments to the state rate will be out of luck and the new arrangement will net somewhere between $75 million to $250 million for Hoosier coffers (that sort of variance is an indicator that nobody knows how much of the state's 7 percent sales tax is being left on the table).
Retailers are required by federal law to collect sales tax only in states where they have a "physical presence," i.e. a warehouse or storefront. Amazon created warehouses in Indiana in 2007 and this current development is the final act of a prior agreement.
As the biggest kid on the e-commerce block, Amazon now advocates the federal government forcing all online merchants to collect sales taxes on every sale.
Paul Misener, Amazon's vice president for global public policy, said at a news conference in the governor's office that the company supported federal legislation requiring all sales tax collections by all online companies.
"It's the only way to level the playing field for all sellers," Misener said. "It's the only way for Indiana to obtain all the sales tax revenue that is already owed."
Last fall in Reason, Veronique de Rugy explained why the push to collect state and local sales taxes in states where a business has no physical presence is a form of taxation without representation.
For any number of reasons—from basic self-interest (saving 6 percent to 8 percent off purchases that get delivered for free to my door is no small advantage) to philosophical premises (the idea that the federal government might pass legislation dictating how non-federal taxes get collected is disturbing, to say the least)—I hope that at least large parts of the Net stay tax-free. But it shouldn't suprise anyone that those days are almost certainly numbered. As the eugenics-loving, pro-involuntary-sterilization legal giant Oliver Wendell Holmes Jr. would tell you, taxes are the price we pay for civilization. Or more precisely, the amount of protetction we pay not to be thrown in jail.
The post Farewell to Internet's Tax-Haven Status?: Amazon to start collecting Indiana state sales tax in 2014 appeared first on Reason.com.
]]>In a press release today, Amazon announced that it now officially supports the Marketplace Fairness Act*, which would force online retailers to become tax collectors in states where they have no physical presence, contradicting Supreme Court precedent.
"Amazon strongly supports enactment of the Enzi-Durbin-Alexander bill and will work with Congress, retailers, and the states to get this bi-partisan legislation passed," said Paul Misener, Amazon vice president, global public policy.
As Ars Technica's Nate Anderson notes, just a few months ago Amazon was still crusading against efforts by states like California to turn the online retailer into a tax collector:
"We oppose this bill because it is unconstitutional and counterproductive. It is supported by big-box retailers, most of which are based outside California, that seek to harm the affiliate advertising programs of their competitors," Amazon wrote in a letter this summer. "Similar legislation in other states has led to job and income losses, and little, if any, new tax revenue. We deeply regret that we must take this action."
But now the online retailer has done an about-face. "It's a win-win resolution," the press release read, "and as analysts have noted, Amazon offers customers the best prices with or without sales tax."
Perhaps those analysts also noted that fighting myriad proponents of an internet sales tax is exhausting, especially when the company's size and efficiencies would ensure that complying with any new tax legislation would be easier and less costly than for most of its competitors.
Read recent Reason coverage of internet sales tax developments here, and Veronique de Rugy's extensive treatment of the topic here.
*UPDATED: A previous version of this post erroneously referred to the legislation Amazon now supports as the "Main Street Fairness Act."
The post After Crusading Against "Internet Sales Tax" Legislation, Amazon Is Now Totally Cool With It appeared first on Reason.com.
]]>Like most good Americans, you probably do not calculate and pay every April the taxes you owe on your Amazon purchases for the past year. Almost no one does, which upsets state officials who see online sales as a potential source of tax revenue.
House Reps. Jackie Speier (D-Calif.) and Steve Womack (R-Ark.) hope to authorize states to collect taxes from online sales with the Marketplace Equity Act, Congress's latest attempt to compel Internet retailers to collect taxes in states where they have no physical presence. State budget shortfalls have fueled the Internet tax craze—in July, Sen. Dick Durbin (D-Ill.) introduced a similar act with a similar name, the Main Street Fairness Act.
Either law would contradict Supreme Court precedent that mail-order catalogs and other remote businesses only have to collect taxes in states where they have a physical "nexus"—a warehouse or an office, for instance. And it's not clear why a company in Oregon, say, should be burdened with the costly proposition of collecting taxes for every other state and sorting through 49 other tax codes.
States have been trying to find a way to tax online retailers for years, but an "Amazon tax" could backfire. States have argued that "affiliates," or partner vendors, merit a taxable connection to a given state. Amazon and Overstock have cut ties with affiliates in various states that threatened to use the affiliate connection to make retailers collect taxes.
The Marketplace Equity Act gives states the flexibility to create their own collection systems, which pleased Betty Yee, a member of California's Board of Equalization interviewed by Politico. This is the same Betty Yee who told The New York Times back in March that the only way for states to close their enormous budget gaps was to collect taxes from online sales, an asinine statement considering such tax collection would account for "less than three-tenths of one percent of state and local tax revenues."
Veronique de Rugy recently outlined the ins, outs, and what-have-yous of internet taxation for Reason. She and her Mercatus Center colleague Adam Thierer propose a much better solution than any Congress members have so far: an "origin based" collection scheme.
The post The Internet Tax Man Cometh Again appeared first on Reason.com.
]]>California this June, meanwhile, effectively closed down Amazon's "Affiliates" program, which pays a commission to websites that link to Amazon in the state, by insisting the bookseller pay sales taxes on any transaction referred from a California-based website. The move followed similar actions in Arkansas and Connecticut.
These are just the most recent skirmishes in a decade-long battle between Amazon and officials in various states over taxing online purchases. Now some in Congress, notably Sens. Dick Durbin (D-Ill.) and Mike Enzi (R-Wyo.), want to give the whip hand to state tax collectors with the so-called Main Street Fairness Act. The bill would allow states to impose taxes on interstate commerce, something usually blocked by the Commerce Clause of the U.S. Constitution.
Many policy makers and journalists view the debate over Internet taxes in narrow terms. They believe the fight is about whether or not federal, state, or local legislators should "tax the Internet." Consequently, the war of words has focused on competing bumper-sticker slogans such as "Don't Tax the Net" and "Level the Tax Playing Field." But framing the debate that way understates the complexity—and importance—of the issue.
The no-taxes side largely ignores the fact that the Internet isn't really a tax-free zone. It is true that, thanks to the 1992 Supreme Court decision Quill v. North Dakota, states can collect sales tax on online purchases only if the retailer has a physical presence in that state. If a Virginia resident buys a book from Amazon, which is based in Washington state, he pays no sales tax. But if he buys the same book from store in Virginia, the transaction is taxed. Likewise, Amazon consumers living in Washington have to pay in-state taxes.
Furthermore, many state governments technically oblige their residents to remit a "use" tax on any goods they purchase out of state. A California resident who buys a computer in sales-tax-free Oregon, for instance, is expected to send the Golden State's Board of Equalization a check for an amount effectively equal to 7.25 percent (California's sales tax rate) of the computer's price. But such levies are extremely unpopular and seldom enforced, leaving Internet users with the impression that their online purchases are tax-free.
On the other side, the arguments offered by people who would like to extend the sales tax to interstate Internet purchases are rarely valid. States claim such taxes will help them cover their cumulative $130 billion budget deficits. Yet a 2010 study for NetChoice—a coalition of trade associations, eCommerce businesses, and online consumers—by Jeffrey Eisenach and Robert Litan of the economic consulting firm Empiris LLC found that "total potential uncollected sales tax revenues in 2008 were approximately $3.9 billion, or less than three-tenths of one percent of state and local tax revenues."
To close their budget gaps, states should go to the source of their fiscal problem: overspending. According to a 2010 working paper by Matt Mitchell, an economist at George Mason University's Mercatus Center, from 2000 to 2009 state and local spending grew at nearly twice the average annual rate as the private sector. Since these governments depend entirely on the private sector for their resources, this level of spending growth is not sustainable.
States also argue that since online shoppers already owe the tax though the use tax obligation, retailers need to be pushed to collect what consumers won't otherwise cough up. But a tax that can't be enforced is a bad tax. And the states' inability to force consumers to pay use taxes is hardly a good reason to impose the collection burden on out-of-state retailers. A 2006 PricewaterhouseCoopers study found that sales tax compliance costs for small retailers (that is, retailers with less than $1 million in sales) equaled almost 17 cents of every dollar they collected for states. Expanded tax collection obligations could increase that deadweight economic burden and discourage marketplace innovation and new entry.
To the extent that sales taxes pose a real problem of unequal treatment, it's a problem of the states' own making. There are approximately 7,500 U.S. tax jurisdictions, each with different rates, each with different definitions and exemptions, most with a sales tax and a few without. Are marshmallows and granola bars a "food" or a "candy"? If they are labeled "candy," they are taxed in some states; if classified as "food," they are not.
The Supreme Court cited this dizzying complexity when it ruled that retailers should not have to collect a jurisdiction's sales tax unless they have a physical presence in that jurisdiction. But states are hoping they will soon be able to circumvent that decision through a tax simplification scheme called the Streamlined Sales and Use Tax Agreement. Twenty-four states already have signed on to the agreement, which they hope will allow them to force out-of-state retailers to become tax collectors. The scheme would tax retailers who don't consume public services. Some states, such as California, would even have the power to tax consumers who reside in other states, thus infringing on state sovereignty. And as my Mercatus Center colleague Adam Thierer noted in an April article for Forbes, the so-called simplification is a 200-page document that doesn't simplify rates or tax bases in any significant way and leaves thousands of loopholes and complexities in place.
While waiting to see whether Congress will come to their rescue, several states, including Rhode Island, North Carolina, and Illinois, have moved to extend collection mandates through an "affiliate" tax on state-based businesses that refer customers to online companies and then collect a commission. Such taxes are known as an "Amazon tax," since the online retailing giant has been the main target. But their main consequence has been to drive online vendors to cancel those commission arrangements, costing the states jobs and tax revenue. Both Amazon and Overstock.com have cut all ties with their Illinois-based partners.
After exiting several states, Amazon is promising jobs and investment in exchange for a tax exemption in some states where it has a physical presence. Such special pleading is the inevitable result of being targeted by tax collectors who are not satisfied with revenue from businesses within their own jurisdiction. However, if Amazon succeeds the results would be the equivalent of corporate welfare: One company will get special tax treatment unavailable to others. That could create a vicious cycle where only large companies can get a tax-free status in exchange for promises of jobs.
There are better ways to level the playing field. One solution is for states to cut taxes on in-state vendors. Another option is an "origin-based" tax regime, under which states would exercise their right to tax equally all sales inside their borders, regardless of the buyer's residence or the ultimate location of consumption. Under that model, all sales would be "sourced" to the seller's principal place of business and taxed accordingly. This approach is already fairly common. A Washington, D.C., resident who buys a car across the Potomac in Virginia, for instance, is taxed at the origin of sale in Virginia regardless of whether he brings the car back into the District. Each day in America, there are millions of cross-border transactions that are taxed only at the origin of the sale; no questions are asked about where the good will be consumed. We should extend the same principle to cross-border sales involving mail order and the Internet. Such an approach would be good for retailers, good for consumers, and good for federalism.
Contributing Editor Veronique de Rugy (vderugy@gmu.edu), a senior research fellow at the Mercatus Center at George Mason University, writes a monthly economics column for reason.
The post Taxation Without Representation appeared first on Reason.com.
]]>Born in 1962 and now living in Utah, Byrne holds a Ph.D. in philosophy from Stanford and serves as the co-chair (with Rose Friedman) of the Friedman Foundation for Educational Choice. He is the former manager of Blackhawk Investment, a cancer survivor, and a black belt in tae kwon do.
An outspoken critic of online sales taxes, Byrne is a self-declared libertarian who champions short-selling while adamantly opposing the more-controversial practice of "naked" short-selling.
From his journalistic perch at the blog Deep Capture, he and his colleagues regularly chart the ways in which regulators routinely stifle innovation and maintain a status quo that favors connected firms at the cost of competitors and consumers alike.
Raised in New Hampshire, Byrne describes himself as a former "Yankee Republican" who has never felt comfortable with anti-market Democrats and no longer recognizes the GOP as the party of small government and individual liberty.
In this 10-minute interview, Byrne explains why school choice is the key issue of our day, how bad regulations contributed to the current economic crisis, and why "the government should pave the roads, run the Post Office, and stay off my porch."
Filmed by Dan Hayes and edited by Meredith Bragg.
Go here for embed code and downloadable versions.
The post Reason.tv: Overstock.com's Patrick Byrne on Internet Sales Taxes, Naked Short-Selling, Regulatory Capture—and why he turned from a Yankee Republican into a fire-breathing libertarian champion of school choice. appeared first on Reason.com.
]]>That was a plan from the National Governors Association to allow state and local governments to collect sales taxes from out-of-state web merchants. Hitting online consumers with new taxes while simultaneously forcing Amazon.com to assess liability for each of its millions of consumers based on where they're located within America's thousands of taxing jurisdictions is an obvious loser. Most D.C. pols have now recognized it as such.
The bad news is that, in the misguided belief that the Internet economy is somehow getting a free ride from taxes (instead of enjoying the Constitutional freedom of interstate commerce), Congress is now looking for a "good" way to tax online sales. The latest effort comes from Senators Judd Gregg (R-NH) and Herbert Kohl (D-WI). Their new bill, known as the New Economy Tax Simplification Act, or S. 2401, gives you a clue to their problem right in its title. As we all know, it would be nice if taxes could be simple, but what we really want is for taxes to be low, or better yet, not to exist at all.
The Gregg-Kohl bill says that state and local governments can tax Internet sales if merchants have a "substantial physical presence" in their jurisdictions. So the state of Washington could tax all the sales made through Amazon.com, because the company is based in Seattle. The idea is to tax sales at the point of origin – Amazon's headquarters – instead of the point of delivery – the consumer. This is certainly preferable to the governors' plan, because it would create a healthy competition among states to offer market-friendly tax policies. The states with the lowest tax rates would encourage businesses to locate inside their borders. Meanwhile, high-tax states would be punished by the loss of such businesses. But an even better idea is to abolish sales taxes.
Of course Internet sales taxes would be bad for the new economy. Of course they would slow the growth of e-commerce. Of course they will hurt online consumers. But what's lost in this fight over online taxes is that sales taxes of all kinds are bad for consumers. In fact, until this Internet squabble began, sales taxes had been thoroughly discredited as an unfair burden that hits the poor harder than any other government program.
A sales tax is a kind of consumption tax, and it's true that we should always tax consumption instead of savings. But an easier, fairer way to institute a consumption tax would be to take annual income and deduct annual savings and investments, then apply the tax rate (both federal and state) to what's left: consumption.
For several years, Rep. Billy Tauzin (R-LA) has been trying to pass a national sales tax to replace the income tax. The idea has gone nowhere, for lots of good reasons. For one, the European version of this idea, the Value Added Tax, or VAT, has proven to be a nightmare of bureaucratic complexity.
Whenever there are new taxes on retail sales, lots of people try to figure out how to avoid them by buying at wholesale or purchasing the goods in another jurisdiction. Then the government has to add new regulations to close the escape hatches, and new requirements on business to help the government collect the money.
On the Net, it would take about five minutes for websites offshore to begin selling tax-free goods to US consumers and about another five minutes after that for a web entrepreneur to create a system for people to gather in cyberspace and buy as wholesalers. Then a new round of regulation would begin and the vicious cycle would begin anew. (If you want to get really depressed, imagine the Internet being regulated by a taxation system developed in France.)
The biggest reason to oppose sales taxes is that they demand the highest percentage of income from the people who make the least. Sales taxes are the exact reverse of income taxes—the less you make, the higher your tax rate.
If Bill Gates and a factory worker both want to have a Miller Lite at the end of a long day, they both must pay the same amount of tax. Even though Bill's income is many times that of the factory worker, and his net worth is perhaps a million times as large, the worker gets hit with just as high a tax bill.
Repeal all sales taxes. They're unfair, they hurt consumers and they'll hurt our economy if they're expanded to include cyberspace. Don't believe these politicians who say that you won't have fire and police departments without sales taxes. Only 16% of local government revenues come from sales taxes.
At the state level, several governments impose no sales taxes at all and 45 states receive most of their revenue from other sources.
And there's no doubt that revenue from those other sources is booming. Many states are running record surpluses, even as they cut taxes. Reports Merrill Matthews, Jr. of the Institute for Policy Innovation, "According to the National Conference of State Legislatures, based on responses provided by 44 states, 24 states have cut personal income taxes recently,14 states have cut corporate and business taxes, and 21 states have reduced sales and use taxes." We can do without sales taxes. And we should.
The post Sales Tax appeared first on Reason.com.
]]>